Now that it has resolved network interconnection issues with the top global carriers, Cogent is not worried that FCC Chairman Ajit Pai’s net neutrality proposals will have a material effect on its NetCentric customer revenues.
Dave Schaeffer, an advocate of net neutrality, told investors during the company's first-quarter earnings call that its NetCentric wholesale service customers’ concerns around the proposed changes are “temporary.”
What makes Schaeffer confident about his thesis is the fact that Cogent has established agreements with other global carriers that can accommodate near and long-term traffic needs.
“I believe that our contracts are sufficient to guarantee that we not only have adequate capacity today, but we'll continue to increase capacity as our customers need it,” Schaeffer said.
NetCentric lumpiness
A key concern for investors was Cogent’s lumpy NetCentric service revenues. NetCentric services are those it sells to other service providers and content providers like Netflix.
Cogent’s NetCentric customers rose by 2.6% year over year, and it ended the quarter with a total of 29,925 NetCentric customer connections. The service provider noted that NetCentric revenue growth experiences “more volatility than its Corporate revenues due to the impact of foreign exchange and also seasonal factors, in particular related to usage revenue.”
Schaffer said the slower growth rate in its NetCentric business is not a long-term issue.
“I do think the 3.8% constant currency year over year, which is lower than the 6.7% year-over-year growth rate we experienced last quarter, is more of a temporary than rather a permanent phenomenon,” Schaeffer said. “I think for our NetCentric business, looking at it on a year-over-year basis is the most rational way whereas on our Corporate business, there's little volatility.”
Cowen and Company said that they were surprised that the proposed net neutrality changes had an effect on Cogent’s NetCentric revenues.
“While we had called out concern regarding net neutrality in our downgrade earlier this week, we admittedly did not expect this to already be an issue,” Cowen and Company said in a research note. “Interestingly, mgmt. reaffirmed its view that it does not expect the potential change to have an actual impact on its business, but rather it was the concern or noise that was potentially changing customer behavior.”
Corporate, on-net revenues rise
While the NetCentric business did not perform as well as it expected, Cogent saw gains in corporate customer and on-net service revenues.
Here’s a breakdown of Cogent’s key first-quarter metrics:
Corporate customers: Corporate customer revenue grew sequentially by 2.7% to $72.4 million and year-over-year grew by 12%. Cogent had 34,318 corporate customer connections on its network as of the end of the quarter.
On-net revenue: Cogent’s on-net revenue was $83.6 million for the quarter, up 0.1% sequentially and 6.2% year over year. On-net customer connections rose 3.7% sequentially and 16% year over year. The service provider ended the quarter with over 54,800 on-net customer connections on its network in its 2,406 total on-net multitenant office buildings and carrier-neutral data center buildings.
Off-net revenue: Off-net was $33.4 million for the quarter, up 13.7% year over year. Cogent’s off-net customer connections increased sequentially by 5.3% to end the quarter serving 9,050 off-net customer connections in over 5,700 off-net buildings. The majority of these buildings are in North America.
ARPU: Cogent’s on-net ARPU including both Corporate and NetCentric customers was $518 for the quarter, a sequential increase of 3.4%. Off-net ARPU, which is comprised predominantly of corporate customers, was $1,261 for the quarter, unchanged from the fourth quarter. The service provider noted improvement in its on-net and off-net customer churn rates. The on-net unit churn rate was 1.2%, down from 1.4% last quarter for an improvement, while off-net unit churn rate was 1%, down from 1.1% in the previous quarter.
Financials: Cogent reported total revenues of $117.2 million, up 8.2% from $108.3 million from the same period a year ago.